Despite constraints construction firms are forecasting a long bull run

Posted On Thursday, 28 September 2006 02:00 Published by eProp Commercial Property News
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Boom times for construction and engineering companies are just beginning, says Carl Grim, CEO of industry giant Aveng.

Carl GrimBoom times for construction and engineering companies are just beginning, says Carl Grim, CEO of industry giant Aveng. He says the sector will have to work flat out to meet the growth in demand from both the public and the private sector.

Grim says that by looking at the rate of development of capital stock - such as railways, roads and power stations - as a ratio of SA's economic growth, it is clear that "this boom still has legs". Investment in capital stock is driven by a number of factors, says Grim. The first is consumer spending. This influences building of new shopping malls, hotels and manufacturing facilities such as automotive paint plants. Aveng believes that consumer demand will fizzle out within the next year because of a tighter monetary policy by the Reserve Bank.

Boom will boost construction margins Demand will last longer than expected.

The second leg is investment in mining and energy generation, which are exposed to exchange-rate fluctuations because they require imported machinery and equipment. The third leg is based on government infrastructure spending. "We think that there are about five to seven years in that leg. Government can really drive this thing," says Grim. He explains that a country ideally wants to be investing in capital at the same rate as its economy is growing. (See graph). Under investment can lead to growth and capacity constraints, which are already evident in SA's power and rail industries.

This is having an impact on Aveng's performance. "Spoornet has cost us a lot of money," Grim says of Aveng's financial results for the year to end-June, which showed profits up by 86%. (See results table). Pierre Blaauw, economist at the SA Federation of Civil Engineering Contractors, says there is enough work available for the industry until 2016 just to catch up with infrastructure backlogs. Though some of this work will come in fits and starts, the trend will be towards steady growth in investment. Blaauw says the R400bn (of which government is responsible for R375bn) in infrastructure spending will boost growth, jobs, housing demand and consumption, which will lead to further investment.

But there are large constraints. Already companies such as Mittal and Sasol are having problems finding the skills for new projects or maintenance work. It's not just an SA phenomenon; Grim says Aveng is experiencing similar constraints at its Australian operations. Aveng has been restrained in adding to its order book. The idea is to wait
until demand increases enough and then cherry pick the projects with bigger margins. "Our view is that you're going to get the really high margin stuff going into the next six months... we held back on our order book in order to get the cream projects," he says. The expected demand will also enable Aveng to be more prescriptive in contract talks.

Grim says the local economy is experiencing the "double-barrelled push from the resources boom and the increase in public spending". However the country's creaking infrastructure and the skills shortage could spoil this, he says. "Attracting and retaining skills is the critical factor to success."

At present there are only 200 engineering graduates produced in a year, half the number of 30 years ago. Peer company Group Five estimates that this number needs to be boosted by 50%/ year as about 5 000 engineers are needed to meet the workload envisaged. Even that may be conservative. Engineering News recently quoted a recruitment firm as stating SA would need at least 60 000 engineers. Group Five says so far in 2006 construction activity is up 20% on last year, with the industry expected to generate at least R100bn in revenue this year

Blaauw says SA has had 20 consecutive quarters of GDP growth, which has exacerbated the capacity constraints of the infrastructure network, particularly in roads, power supply and rail. If government is to come anywhere close to meeting its 6% growth target it needs to release public funds for infrastructure funding very soon.

Last modified on Thursday, 17 October 2013 16:53

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